CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
As the need of financial statement of an organization cannot be looked down upon by the user such as investors creditors, members of the organization, government and even the general public the researcher has taken up this topic “the impact of inflation on financial statement of an organization” as a project to be researched upon as to finding solution to the impacts. Financial statement of any organization contained the summarized information of its financial affairs organized systematically over a period of time the vital and crucial importance of financial statement is not only to the member of organization but also to third parties dealing with the organization as have been mentioned above as well as financial analysis to examine the performance in order to make good investment decision tax rate determination and distribution of profit or divided. It has been realized for many year that financial account prepared based on historical costs can be misleading in time of changing price that is inflation. During economic crisis inflation results to distortion of financial statement since the accounting measuring rod of value of money and accounting profits is also measured in monetary terms the historical values at which assets and liabilities are sated in the balance sheet becomes unrealistic in times of inflation. For instance if divided payment are made on the basis of historical cost profit it might lead to servers under capitalization of the organization concepts of inflation. Therefore inflation has become the phenomenon that has been haunting dierent economy in the world for along time now, particularly in drawing financial statement for organization. This condition of declining value can result from using historical cost concept which will invariably distort the reliability of the fixed assets in an organization as to preparing financial statement. Not withstanding the panacea to this phenomenon of inflation on financial statement is to adopt the theory of current cost accounting concept so as to reflect the eect of changing price on operational capability.